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Current Monetary Policy - The Unintended Consequences

Integer Investments profile picture
Integer Investments


  • The current monetary policy led to negative interest rates around the world.
  • This policy triggered negative consequences: excessive risk taking and lower consumption.
  • Developed nations should act in concert to raise rates to avoid further damage and risks.

Since the financial crisis, central banks around the world have reduced interest rates to very low levels and, in certain cases, even into negative territory. I believe this strategy has two issues. First, it is no longer providing the expected results and second, it has been stretched too far. In my opinion, interest rates should have been raised long ago.

Let's take a step back. Why do central banks reduce interest rates? To put it simply, central banks lower rates to encourage spending and discourage saving, by both companies and individuals. Today I will focus on the story for individuals, companies is for another time. The simple rationale is that it is more convenient to invest and spend, for example in a house or a car, when interest rates are low. This is because low interest rates reduce mortgage or loan payments. At the same time, low interest rates discourage saving simply because the interests earned on savings decrease.

In the years after the recent financial crisis, these mechanisms led to a sustained period of investment and a reasonable rate of economic recovery. However, these mechanisms have now been overextended. Many believe that a wide range of assets are expensive and existing within a bubble that could easily burst. In a recent interview, Esther George (FED Dallas) mentioned that "a failure to keep interest rate policy in line with improving fundamentals can distort the allocation of capital toward less fruitful-or perhaps excessively risky-endeavors." She also argued that low interest rates could spark dangerous asset bubbles and financial destabilization.

These bubbles have already formed. Londoners have to invest more than ten years of their salary to buy a house (Nationwide). This is the highest level ever and it compares with a long term average of five years. The stock exchange is

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Integer Investments profile picture
At Integer Investments we focus on US and European equities with a value/GARP strategy. Most articles are written by our portfolio manager Cristiano Bellavitis, Ph.D. Articles written by our analysts will be signed at the top. To view the profile of our analysts please visit our website.Cristiano is also an Assistant Professor at the Whitman School of Management, Syracuse University (United States). He earned a Ph.D. from Cass Business School, City University of London. He applies academic rigour to our investment strategy. If you want us to follow certain stocks or if you are interested to learn more about Integer Investments feel free to get in touch.(www.integerinvestments.com)

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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Comments (2)

Great, well said analysis
Integer Investments profile picture
Thank you very much! I am glad you enjoyed it.
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